Monday, November 10, 2008

Criticism of the IMF

The IMF plays an important role in trying to alleviate and stabilise financial crisis. However, its role has come under intense scrutiny and it has been criticised for variety of reasons and from a range of different sources. These are some of the main criticisms of the IMF:

1. Exacerbates Economic Problems. It is argued that the conditions of IMF loans cause more harm than good. In the Asian Crisis of 1997, many criticise the IMF's insistence on deflationary fiscal policy (Spending cuts and tax rises) and higher interest rates. It is argued the IMF turned a minor financial crisis into a major economic recession with unemployment rates in countries like Thailand, Indonesia and Malaysia shooting up. Chief economist of the World Bank, Joseph Stiglitz, was particularly scathing in the IMF's insistence on high interest rates as Thailand entered recession. (IMF criticised)

2. One Size Fits All. The IMF frequently argues for the same economic policies regardless of the situation. For example, devaluation of the exchange rate may help many countries, but, it doesn't mean that this is always the solution. Policies of privatisation and deregulation may work better in developed countries in the West, but, maybe more difficult to implement in the developing world.

3. Decline in Public Services Arguably the insistence on Spending cuts (fiscal responsibility) lead to decline in public services. One report suggests the IMF spending cuts are responsible for a resurgence of health problems amongst countries which received aid. (IMF linked to higher tuberculosis rates) (IMF linked to Cholera). The IMF is frequently criticised for ignoring the impact of its policies on the poor, concentrating only on macro economic data

4. Takes away political autonomy. Countries such as Jamaica, argue that the IMF take away the ability for countries to decide national policy. Instead they have to follow the economic dictates of an unelected body, with a perspective skewed by free market ideology and the interests of the developed world.

5. Moral Hazard. The IMF has also been criticised by free market economists arguing that they do to much. They argue that intervention creates moral hazard (encourages countries to be reckless because they can rely on IMF loans) The intervention is often based on poor information and fails to deal with the economic problems. It is argued that rather than the IMF, countries should take personal responsibility.

I have to say there are many more criticisms of the IMF than this. The IMF have been criticised for just about everything from supporting right wing dictatorships, facilitating corruption (e.g. Kenya in the 1980s) to encouraging the destruction of the environment and the culture of indigenous people.

IMF - Saint or Sinner?

The reality is something in between. At times they have appeared rather inflexible insisting on fiscal responsibility and privatisation at a time which might not be helpful for the economy. The criticism of exacerbating the Asian crisis has a strong argument.

But, at the same time, it must be remembered, people call on the IMF in times of crisis. When you have a balance of payments crisis, depreciating exchange rate, there is no easy painless fix. Whatever the IMF recommend people would use it as a convenient point of blame. It is hardly surprising governments do blame an external body like the IMF, it helps to deflect criticism from the government and why the economy ended up needing a bailout.

This does not mean that the IMF are blameless, far from it. They have made many mistakes and errors of policy. But, they have been criticised for both doing too much and also doing too little. They have accused of being free market ideologues but also have been accused of interfering too much with free market mechanisms.

The problem the IMF face at the moment, is that they simply don't have the necessary funds to bailout the amount of debt in emerging economies. The President of Pakistan has complained that the current response of the IMF has been tardy and too slow (link) It may require greater intervention from member states such as the US, gulf states and the European Union. If the intervention is carefully managed, then short term loans may mitigate some of the worst effects of the current financial crisis.